Babson of Babson-United Inc. in Massachusetts runs one of the oldest independent financial advisory firms in the U.S. The firm manages more than $2 billion.

Babson says interest rates -- those set by central bankers and those set by investors in the bond market -- are likely to rise on both this side of the pond and in Europe. The Bank of England will discuss interest rates Thursday. The Federal Reserve's policy makers will scrutinize the U.S. economy's growth, a torrid 5.7 percent annual rate in the third quarter, on Feb. 1.

"The market is already discounting a 25-basis point rise in February, and it could be a 50-point rise," said Babson, who isn't panicky yet, just concerned.

After all, the yield on the 30-year Treasury bond
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is up 200 basis points since November 1998. On Wednesday, the yield rose to 6.701 percent as bond prices fell and stock markets around the world turned in a mixed performance.

On Oct. 5, 1998, the long bond yield was 4.70 percent. At the time, as most of us recall, the world's investors were flocking to the safety of U.S. Treasury bonds, right after hedge funds exploded in the wake of a global fiscal meltdown.

The prospect of a relatively risk-free government bond yield might look awfully tempting to investors who have enjoyed five years of tremendous stock market appreciation in the United States.

Market timing

One newsletter that crossed my desk this week, Bob Brinker's Marketimer, just switched to a 60 percent cash reserve. "We are struck by the higher level of risk now present in the stock market on the heels of the most awesome five-year market period in history," Brinker's newsletter said.

Brinker cited the "added competition for the stock market" as bond yields rise, thus luring investors to cash in their gains and go with the safety of fixed-income securities. The Federal Reserve also has been reducing the M-2 money supply's growth. And consumer prices are growing at a rate of almost 3 percent in the United States. (They used to call that inflation.)

Babson says he has taken note of the money-supply figures. Basically, central banks around the world let lots of cash slosh around the globe toward the end of 1999 -- mostly to smooth out any Year 2000 selling or hoarding panics.

"Here you have had a flush of liquidity in the marketplace, and in monetarist terms that is what may have caused the bump up in (stock market) prices at the end of the year," Babson said. "And now they (central banks) are in the process of mopping up."

On Thursday, the government will publish its latest U.S. producer prices. Most economists see wholesale prices for goods rising 0.3 percent.

"The various components of what it looks like could spook some people, whether it is food and energy or something else," says Babson. Indeed, the pace of the price rise in intermediate goods -- those goods like steel or plastics that are on their way to factories to become finished products -- might surprise investors, some economists say.

Such an inflation shock, even a small one, could force even high-flying technology stock investors to readjust their portfolios.

Babson says U.S. retail sales, which come out Thursday, will continue to show the strength in the economy. It is unlikely, he said, that consumer confidence will ebb. Then, on Friday, more numbers, including the consumer price index, industrial production and capacity utilization, come out.

So it's a numbers-watcher's week.

Babson says Europe and the United States could compete for investors' capital, especially if companies' capital equipment needs continue to soar in a thriving American economy.

Not that Babson is predicting doom and gloom.

He is telling the firm's clients to continue looking at buying opportunities in the big technology companies, like Microsoft
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EMC Corp.
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International Business Machines
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and Lucent Technologies
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Nearly all of these companies -- but not computer storage company EMC, one of the best U.S. stock performers of the 1990s -- have an earnings or regulatory cloud of one type or another hanging over them.

Babson also likes some of the hard-hit financial stocks, among them AIG and Chase.

Of course, all that can change in a day or two. Babson puts together the Babson-United Investment Report, a newsletter, after the markets close each Friday. It's been coming out for 100 years now.

Babson doesn't believe in buying and selling for the sake of buying and selling, even if higher interest rates look like they might deflate the stock-market party of the past five years. "One of the big buzz words out there is rotation: I often speculate that the whole idea of rotation is to create transactional activity (for brokers)," he says.

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